EU watchdog says shortcomings in bank stress test need fixing

LONDON (Reuters) - Shortcomings in the European Union’s stress test for banks could be fixed by including elements from the Federal Reserve’s health check of lenders’ resilience to shocks, a top EU regulator said on Thursday.

Andrea Enria, chair of the European Banking Authority, said the EBA lacked powers to directly challenge the results it gets from the banks it tests to see how well their capital buffers could weather falls in markets, rocketing unemployment or a collapse in property prices.

Europe is also slow to take action in response to the results, unlike in the United States where there are rapid follow-up measures, he said.

“Results are published, but there is no clarity on how they feed into corrective measures, how supervisory judgment is used, if and to what extent there will be any communication on the outcome of this process,” Enria said in a speech at the National Bank of Romania.

“The decoupling of stress test results and supervisory actions and the inconsistency between the transparency of the former and the opaqueness of the latter are, in my view, the main shortcoming of the EU approach compared to the United States,” he said.

EBA has published the results of its latest biennial stress test, showing banks were generally holding enough capital.

Enria is set to become the new head of banking supervision at the European Central Bank, which supervises 33 of the 48 lenders stress tested this year.

Banks in the EU are allowed to use their own internal models in a “bottom up” test, though under supervision.

The EBA test has been criticized by market analysts in the past for being too soft compared with the Federal Reserve’s “top down” exercise.

Enria said options included refining the existing method for testing banks, or going for a more fundamental redesign.

Tweaks could include a more “dynamic” test that reflected how a bank’s balance sheet in real life evolved during the exercise, such as the sale of assets or build up of capital, a feature of the Bank of England’s own test of top UK lenders.

The current EBA test starts from a static or fixed cut-off point for balance sheets.

“It is very possible, and indeed likely, that we will conclude that radical changes are not warranted,” Enria said.

Opting for a “novel” approach of combining top down and bottom up elements would need several years to agree and develop reliable supervisory models, Enria said.